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A newly filed document shows Indianapolis-based Steak n Shake Co.’s purchase of Western Sizzlin Corp. was the idea
of Sardar Biglari, who leads both companies, and that Biglari played a key role in shaping the $39 million
deal.

The purchase of the Roanoke, Va.-based company has raised eyebrows because of the potential
for conflicts of interest stemming from big ownership stakes held in both firms by Biglari investment
groups. When the deal was announced in August, at least one analyst suggested it involved self-dealing,
and some class-action attorneys began scouting for clients for a possible lawsuit, though none apparently
has been filed.

The document, filed with the Securities and Exchange Commission in preparation
for the Western Sizzlin shareholder vote on the purchase, says that Biglari proposed the deal at Steak n Shake
shareholder meetings on Jan. 8 and Jan. 14.

In response, the boards of both companies formed special committees
to consider the deal that excluded Biglari and business partner Phil Cooley. After discussions, Biglari “advised the
Steak n Shake board that further consideration should be deferred,” according to the filing. The
filing does not explain why, and Biglari did not return a call from IBJ.

Biglari
revived the discussion in early May, triggering formation of a special Steak n Shake
committee of independent directors comprised of John Ryan, a former Indiana University president; Ruth
Person, chancellor and professor of management at the University of Michigan-Flint; and William Regan,
a private investor who formerly was chief financial officer of the California Independent
System Operator Corp.

Biglari that month provided Regan, the committee
chairman, with a “preliminary assessment” of the deal’s value. He also told
Regan “he desired that the special committee should remain open to transaction structures” beyond the common practice
of paying for a purchase by issuing stock.

The filing shows Regan took steps to try to mitigate conflicts. For
example, he didn’t disclose to Biglari and Cooley that Steak n Shake’s financial adviser had provided a preliminary
value for Western Sizzlin of between $12 and $13.50 a share. Instead, he reported to the full board that the special committee
would be comfortable with an offer from $12 to $13 a share.

The document suggests the special committee initially
was reluctant to pursue the unusual structure of the deal, which called for Steak n Shake to pay the bulk of the purchase
by issuing bonds to Western Sizzlin shareholders.

Final terms call for Steak n Shake to issue $23 million in bonds,
paying a steep 14 percent interest for five years. The rest of the deal’s $39 million value comes
from Western’s transferring directly to its shareholders 1.3 million Steak n Shake shares it already
owned. That transfer occurred earlier this month.

The decision to issue bonds, the approach championed by Biglari,
will generate a steady stream of interest income for him and his investment group. The filing says Biglari
justified that approach on the grounds that Steak n Shake shares were undervalued and thus not an ideal
currency to use for the purchase.

According to the filing, the boards of both companies approved
the deal in part because they concluded the combined firm would save on overhead costs. Steak n Shake’s
board also noted that it would boost the company’s scale in the restaurant industry and was consistent with Biglari’s
strategy of turning Steak n Shake into a holding company for various businesses. Steak n Shake is by far the larger company,
with 485 restaurants, most of them company owned. Western Sizzlin has 101 franchised steakhouse restaurants.

In
an August report, Michael Gallo, an analyst with CL King, looked askance at the deal, in part because Steak n Shake’s
turnaround is still young.

“At first glance, there seems to us to be some self-dealing regarding the transaction,”
he wrote. “Given the apparent progress toward stabilizing [Steak n Shake] over the last couple of quarters, this transaction
makes no sense to us.”

Western Sizzlin hasn’t set the date for its shareholder meeting. Based on the
current price of Steak n Shake shares, Western Sizzlin shareholders are to receive a total of $13.65—$8.07 in bonds
and $5.58 in Steak n Shake stock distributed by Western.

The deal was worth about $13.25 a share on the day it
was announced, but the value has grown because Steak n Shake’s share price has increased. Western Sizzlin shares were
trading at $12.75 the day before the announcement.

A native of Kentucky, Andrews has worked at Hoosier newspapers since graduating from Indiana University in 1987. He covered education at the Journal and Courier in Lafayette before joining IBJ in 1991. He left in 1995 to serve as Statehouse reporter for the Evansville Courier and later served as a business reporter and the business editor of The Indianapolis Star. He’s been writing his Behind the News column for IBJ since rejoining the newspaper in 2000. Outside of work, Andrews enjoys bicycling, basketball and reading. He and his wife, Kathleen, live in Indianapolis and have two sons.